Lackluster Q4 earnings just what market wanted

Stocks set to keep rising on hopes of later gains, pent-up demand

By

RussBritt

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LOS ANGELES (MarketWatch) – Corporate earnings are on track to grow at a lukewarm pace in the fourth quarter, but don’t expect that to stop the stock markets from extending recent gains, even though they’re at five-year highs.

One reason is that S&P 500 companies did even worse when they reported last quarter and another is that the coming year is bringing hope for robust growth in the second half.

Roughly 2½ weeks into the reporting season, earnings are growing in the expected range of 2% to 3% thanks largely to gains in the financial and materials sectors, according to FactSet and Thomson Reuters I/B/E/S. Plus, two-thirds of the companies beat expectations, roughly the average for the last year. The numbers are fitting in with analyst expectations.

But earnings growth during the third calendar quarter of 2012 was near zero — negative according to one estimate — and that number could surge into the double digits as early as the third quarter of 2013, analysts say. There’s still some money to be made, says Gregory Harrison, analyst for Thomson Reuters.

“The market has been at low valuations for quite a while now,” he said.

The Dow Jones Industrial Average and the S&P 500 both are trading at five-year highs. The Dow is up 6% since Jan. 1 while the S&P has gained 5% and closed Friday above 1,500. The Nasdaq Composite Index, meanwhile, isn’t even trading at a one-year high, but still has climbed 4% thus far this year.

Thomson Reuters says that as of Friday, earnings growth stood at 2.9% for the 147 S&P companies that had reported up to that point. A total of 68% beat earnings estimates. The numbers are nearly the same on revenue, as 65% of companies beat sales estimates for a growth rate of 2.3%.

The numbers were roughly the same for FactSet, which had fewer companies that it had processed but showed an earnings growth rate of 2.3% nonetheless. That was up from last week’s rate, which showed earnings growing at a paltry 1.9%.

While that seems like nothing to write home about, FactSet analyst John Butters says a little perspective may be in order.

“These are record profits on top of record profits,” he said.

Butters calculates that earnings actually dropped by roughly 1% when the third quarter’s results were reported, partially due to difficult comparisons with earlier quarters. Harrison estimates that earnings ticked up marginally, by 0.8% during that time.

As earnings seasons progress throughout 2013, rapid improvement is seen by both. Similar earnings growth rates are expected for the first calendar quarter, but that may well rapidly change during the second quarter, the analysts say.

Butters sees a 6.6% gain while Harrison estimates 7.7% increase for the second quarter. For the third quarter, both expect earnings growth to cross the double-digit mark at slightly more than 10%. In the final quarter, Butters expects an increase of more than 18% while Harrison sees it at just over 17%.

“It’s typical for analysts to be more optimistic the farther out they’re projecting, but they still see improvement,” Harrison said.

Leading the earnings charge during the quarter thus far are financial firms. Strong earnings from the likes of J.P. Morgan Chase & Co.
JPM, -0.90%
and Goldman Sachs
GS, -2.08%
— the latter of which beat estimates by nearly $2 a share — helped lift all boats in that sector. That includes underperforming Citigroup Inc.
C, -1.32%
whose earnings fell short of estimates by nearly 30%.

As of Thursday, Harrison had the sector gaining 12.5% in profits during the quarter.

That was followed by the consumer discretionary sector, which was up 11.1% thus far. That group was no doubt helped by the stunning 13 cents a share profit reported Wednesday by Netflix Inc.
NFLX, -2.94%
when the Street expected a 13-cent loss instead. That, plus a couple of glowing analyst recommendations, catapulted the company’s shares by nearly 43% in Thursday trading.

On the other side, telecom and technology aren’t off to a rousing start, given Verizon Communications Inc.’s
VZ, -0.26%
disappointing results earlier this week and Apple Inc.’s
AAPL, -1.64%
steep tumble on Thursday.

Apple on Wednesday reported disappointing financial results and gave a weak forecast, dashing Street hopes of a massive surprise gain. Shares ended the day down more than 12% to $450.50. See Apple earnings story here.

But the percentage of those exceeding estimates thus far is at least a couple points ahead of where they were at this point in the third quarter — and five points ahead of last year’s pace, Freeman said.

“What we’re seeing is a greater breadth of fundamentals in the economy that are going in the right direction,” Freeman said. “It’s not rapid, rapid growth but it’s broader growth.”

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